How did my investments do compared to the market? This is a question most of us ask. We're used to measuring our investment performance against a particular benchmark, like the S&P 500 Index (the broad U.S. stock market) or the S&P/TSX Composite Index (a proxy for the Canadian stock market). Many investors also compare their investment’s performance to that of their friends’ or neighbours’. But how does that kind of thinking help you know if you're on track to reach your goals?
What is Goals-Based Investing?
Goals-Based Investing (GBI) is a personalized approach to investing, which considers your investment strategy within the context of your personal and financial goals. It’s a mindset that's becoming more popular as a way to ensure that you manage your investments with your personal goals in mind, whether it's retiring by a certain age with a certain lifestyle, providing kids with a post-secondary education, saving for the next vacation or all of the above.
When you know exactly what the money is for, the time you have to achieve those goals, and your tolerance for risk, you can construct your investment portfolio accordingly.
With GBI, having open conversations with your advisor about the purpose of the money is key to defining your goals. Retirement, for example, may be the reason you're saving, but what sets GBI apart are the details, like your ideal retirement age; the cost of your desired lifestyle; whether you plan to continue working part-time; where you'll live; and what kind of legacy you want to leave behind.
"An advisor can act as a coach or sounding board to help you think about your goals, articulate and quantify each goal and then plan for them," explains David Nicholson, Vice President of CIBC Imperial Service.
An advisor can also help with behavioural coaching, making sure you don't make hasty or counterproductive decisions, like buying high and selling low when the markets are volatile.
How do you evaluate performance and success?
Another notable feature of GBI is the way performance and success are measured. The probability of achieving or missing an absolute target becomes the key measure, not outperforming the market. Nicholson defines success as "being on track to meeting your desired goal."
For example, if you're saving for retirement and the market falls by 15%, but your portfolio only declines by 10%, your investments would traditionally be deemed to have "outperformed" by market standards. But a negative return so close to retirement puts you further from your goals, not closer. Downside protection may be much more important than beating the market as you get closer to retiring. With GBI, the focus is on you rather than the broader markets.
Segmenting your savings
One way you can use GBI is by taking advantage of "mental accounting" to bucket your money into distinct silos. Different account structures make it convenient to do that. For example, if you're saving to send your kids to university or college, you can use a Registered Education Savings Plan (RESP) to hold a mix of investments, like stocks, bonds and cash that are best suited to that goal in the time frame you have for achieving it.
At the same time, you can use a Registered Retirement Savings Plan (RRSP) to save for your retirement, choosing a different mix of investment assets (known as asset allocation) to achieve a goal with a much longer time horizon.
GBI also forces you to look at the broader financial picture.
“We are adding value by truly understanding our clients' goals, and constructing not just the investment portfolio, but the client's entire financial affairs," says Nicholson.
Here too, an advisor can help you avoid making emotional decisions by putting things like the latest news into perspective and discussing if you should stay the course by reviewing your portfolio. GBI connects the dots between your investment goals and your broader financial plan.
Is it right for you?
“GBI is about having those valuable conversations to figure out what is important to you both now and down the road,” says Nicholson. "From there, an advisor can help you determine the appropriate investment solutions and specific strategy that fits your goals," and who doesn't enjoy a good conversation?